FISERV INC. 10-Q Summary: Period Ended June 30, 2004
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for FISERV, INC., an independent provider of information management systems and services to the financial industry. The report covers the three and six-month periods ended June 30, 2004. The company operates through four segments: Financial outsourcing, Health plan management, Investment support, and Other/Corporate.
Key Financial Metrics
Revenue and Profit (Six Months Ended June 30, 2004):
- Total Revenues: $1,883.5 million (Processing and services: $1,695.9 million).
- Net Income: $187.8 million.
- Diluted Earnings Per Share (EPS): $0.95.
- Operating Income: $317.1 million.
- Operating Margin: 19% (down from 21% in the prior year period).
Cash Flow and Liquidity:
- Net Cash Provided by Operating Activities: $317.0 million.
- Free Cash Flow (Non-GAAP): $251.6 million.
- Cash and Cash Equivalents: $232.7 million (as of June 30, 2004).
- Capital Expenditures: $69.9 million.
Debt and Capital Structure:
- Long-Term Debt: $486.0 million.
- Short-Term Borrowings: $158.4 million.
- Shareholders' Equity: $2.42 billion.
- Credit Facility: New $700.0 million facility entered into March 31, 2004.
Material Changes vs. Prior Period
Revenue Growth: Total processing and services revenues increased 36% ($447.8 million) for the six months ended June 30, 2004, compared to the same period in 2003. Internal revenue growth (excluding acquisitions) was 10%.
- Health Segment: Revenues surged 162% to $424.9 million, driven largely by the inclusion of pharmacy services businesses. Internal growth in this segment was 46%.
- Financial Segment: Revenues grew 18% to $1,096.1 million, primarily due to acquisitions. Internal growth was flat at 1%.
- Investment Services: Revenues increased 6% to $116.5 million.
Cost and Margins: Cost of revenues increased 39% to $1,378.8 million. The increase in "Other operating expenses" (up 137%) was primarily due to the high proportion of prescription ingredient costs in the new pharmacy services business. Consequently, the Health segment's operating margin decreased from 14% to 9%.
Profitability: Net income increased 23% to $187.8 million. Operating income increased 24% to $317.1 million, driven by the Financial and Health segments, despite a decline in the Investment Services segment.
Outlook, Risks, and Management Commentary
Management Commentary: Management attributes revenue growth to sales to new clients, cross-sales, and transaction volume increases. The company utilized $210.6 million of free cash flow to repay long-term debt. The company remains in compliance with all debt covenants, including a minimum net worth of $1.8 billion.
Risks and Contingencies:
- SEC Inquiry: The company's broker-dealer subsidiary, Fiserv Securities, Inc. (FSI), is responding to an SEC industry-wide review regarding mutual fund trading practices (market timing and late trading). FSI incurred a $6.0 million charge in Q1 2004 and additional legal fees in Q2. Cumulative revenues associated with these practices are estimated at $4.6 million. Potential fines or penalties could materially impact future results.
- Forward-Looking Statements: The filing includes standard safe harbor language regarding risks related to economic, competitive, and regulatory factors.
Investor Verification Checklist
- Verify the sustainability of the Health segment's revenue growth given the low margins (9%) associated with the new pharmacy services business.
- Monitor the outcome of the SEC inquiry into Fiserv Securities, Inc. and potential financial penalties.
- Assess the impact of acquisitions on reported revenue growth versus the 10% internal growth rate.
- Review the company's ability to maintain debt covenants as it continues to repay long-term debt.
- Confirm the stock-based compensation pro forma impact, which reduces reported net income by approximately $9.7 million for the six-month period.